What is effective gross income (EGI) in commercial real estate?
Effective gross income (EGI) in commercial real estate is all the income generated by a property, including rent, tenant reimbursem*nts, and income from sources such as vending machines, laundry machines, and late fees. It can also be defined as a property’s potential gross income, after expenses such as vacancies and credit costs have been subtracted. EGI is an efficient way to estimate a property’s value and cash flow.
In general, effective gross income can be calculated in one of two ways. A simple EGI calculation would only involve taking rental income, adding other income, and subtracting the property’s vacancy. In contrast, a complex EGI calculation would involve more of the factors mentioned above, and would take potential market rental income and subtract loss to lease, vacancy, and credit loss, while adding any other income generated by the property.
For instance, if we use the numbers from the gross potential rent example early in this article, assuming the vacancy was 7% (the national average), and that the property generated $2,000 a month in other income ($24,000/year), we could do a simple EGI calculation like so:
$300,000 + $24,000 - $21,000 = $303,000
However, if we use a more complex calculation, we might factor in a credit loss of 2% of rent ($6,000) and a loss to lease of $12,000 (for instance, if the owner gave 5 out of the 10 tenants one month of free rent). This EGI calculation would end up looking slightly different:
$300,000 + $24,000 - $21,000 - $6,000 - $12,000 = $285,000
So, while using the complex calculation is certainly a more exact way to estimate the EGI of a commercial property, both methods are an excellent tool that investors can use to determine whether a property can truly be profitable.
